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Corporate Finance > Financial Management > Flashcards

Financial Management Flashcards

1
Q

Financial Management

A
  • PCOD (Planning, Coordinating, Organising and Directing) activities
  • Acquisition and application of an Entity’s finance resources
  • To achieve specified financial goals
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2
Q

Aspects of Financial Management

A
  1. Procurement of funds (B/S liabilities), Capital Structure, Financing Decisions
  2. Utilisation of funds (B/S Assets), Investment Decisions
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3
Q

Types of Funds

A

Long term and short term sources, differently sourced funds have different risk, cost and control, objective is to minimise cost of funds

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4
Q

Long term sources of Funds

A

Equity, Preference Capital, Debentures, Term Loans (DEPreCaT)

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5
Q

Short term sources of funds

A

Trade Credit, Short-term advances, bank finance for working capital, etc (BAT)

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6
Q

Procurement activities

A
  1. Identification of Sources of Finance
  2. Determination of Finance Mix
  3. Fundraising
  4. Division of profits between dividends and profit retention
  5. Balancing risk, cost and control factors
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7
Q

Utilisation of Funds

A

Funds invested in different assets have different yields, goal is to maximise return, fixed and current assets

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8
Q

Fixed Assets

A

Capital projects and other long term investments

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9
Q

Current Assets

A

Stock, Debtors

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10
Q

Utilisation activities

A
  1. Identification of different investment and business opportunities.
  2. Evaluation fo different projects
  3. Balancing Fixed Assets and Working Capital needs
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11
Q

Major Considerations in procurement of fund

A

Risk, Cost, Control

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12
Q

Risk fund types

A

Low risk: own funds (equity), High risk: loan funds (debt)

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13
Q

Cost types

A

Equity- Most expensive, dividends not tax deductible, dividend rates> interest rates
Loan- Cheaper, interest is tax deductible

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14
Q

Control types

A

Equity- dilution of control
Loan- no voting power

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15
Q

Evolution of FM

A
  1. Traditional Phase: only for special, significant and occasional events: mergers, acquisitions, liquidation; focus towards shareholders and lenders
  2. Transitional Phase: FM required for the day-to-day decision making of top-level managers; focus: fund analysis, financial planning and control
  3. Modern phase: Supportive and facilitative for everyone; focus: from corporate strategies to regular and procedural aspects
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16
Q

Role of CFO

A
  1. Budgeting, Strategic Planning and Forecasting
  2. Profitability and Pricing Analysis
  3. Outsourcing vs In-House
  4. Evaluation of IT and HR
  5. Risk management
  6. Merger and acquisition management
  7. Statutory Compliance

PROBEMS

17
Q

Why has CFO’s profile changed?

A
  1. Reporting: Financial reporting needed to be more rigourous
  2. Regulations: Increase in Statutory/ Regulation Requirements
  3. Talent and Capability: Focus on functional area talent, managing and organisation capability
  4. Globalisation: Maximise profits in a global market
  5. Risk Management: Nature of risk changed, requires more effectiveness
  6. Technology: Increase in tools and technology, need to be proficient
  7. Stakeholder Management: Managing stakeholder relationships
  8. Strategy: Auditor for strategy validation and execution
  9. Service Function: Best service at least cost

3RGT3S

18
Q

Primary Objectives of FM

A
  1. Profit Maximisation
  2. Wealth or Value Maximisation
19
Q

Other Objectives of FM

A
  1. Customer Satisfaction
  2. Employee Welfare
  3. Maintaining and improving Market Share
  4. Market leadership in terms of products, technology, services
  5. Good corporate citizenship in terms of tax remittance, ecological balance.
20
Q

Profit Maximisation

A
  1. Main focus: short run
  2. essential but not sufficient
  3. Advantages: Imp for survival, Growth and Development, Impact on society via factor payments, only profit making firms can pursue social obligations, easy for ME
  4. Disadvantages: profit is vague, higher profits higher risk, Ignores time patterns of return, ignores business’ social and moral obligations, emphasises short term gains
21
Q

Wealth Maximisation

A
  1. represented by market price of capital (shares and debentures) dependent on EBIT Earnings Before Interest & Taxes (EBIT), and Capitalisation rate.
  2. Earnings take into account present and prospective earnings, timings and risk of these earnings, dividend policies of firm, other revenue factors
  3. capitalisation rate is the cumulative result of the various stock holders regarding risk and other qualitative aspects of a company.
  4. Value of form: earnings/ capitalisation rate. better objective as it represents risk and returns,
22
Q

Superiority & Limitations of Wealth Maximisation, Comparison

A

Read notes

23
Q

Ezra Solomon Theory FM

A
  1. Determining size and growth rate of entity
  2. Composition of its assets
  3. Determining its capital structure
  4. Managing Financial Affairs of Entity
24
Q

Wealth computation

A

E (earnings)= G - (M + T + I)
G: Average future flow of gross annual earnings
M: Maintainence charges, average annual re-investment required to maintain G at projected level
T: Expected Annual Outflow due to taxes
I: Expected annual otflow due to interest, preference dividend, etc

V= E/K
K= Capitalisation rate/ discount rate

Net wealth (W)= V

Corporate Finance (3 decks)

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